ESG-friendly funds for the value investor
We take a look at two managed funds with above average ESG ratings that are not skewed to growth companies.
Mentioned: Coles Group Ltd (COL), Deterra Royalties Ltd (DRR), ANZ Group Holdings Ltd (ANZ), Bapcor Ltd (BAP), Brambles Ltd (BXB), Insurance Australia Group Ltd (IAG), National Australia Bank Ltd (NAB), Orora Ltd (ORA), ResMed Inc (RMD), Wesfarmers Ltd (WES), Woolworths Group Ltd (WOW)
The value comeback is well underway and investors who take environmental, social and governance (ESG) issues into account are missing out.
Many ESG-friendly equity funds are skewed to growth companies, those with the potential to quickly increase revenue and outperform. These companies are often in technology or healthcare, sectors with less ESG risk, in part because they are less energy intensive.
Traditional value sectors such as energy or manufacturing often produce more emissions and carry more ESG risk.
For ESG investors looking for some value to balance out the growth, we’ve screened for two value-oriented managed funds that also score top marks on Morningstar’s sustainability rating, which measures how well the companies within a fund’s holdings are managing their ESG risks in relation to others.
These funds are also Morningstar medalists, meaning analysts have conviction the fund can outperform its peer group on a risk-adjusted basis.
Perpetual Wholesale Ethical SRI
Perpetual Wholesale Ethical SRI is an actively managed Australian equity fund whose sustainable filters skew the portfolio to small and mid-caps, making it complementary to a portfolio dominated by large caps.
Unlike other ESG focused funds, Perpetual Wholesale Ethical SRI is not heavy invested in healthcare and technology. Instead, the fund’s screens lead to higher weights in the financial and consumer discretionary sector among its 30-80 companies.
Perpetual’s top ten holdings are a mix of well-known names and smaller Australian companies.
National Australia Bank (ASX: NAB), ANZ Banking Group (ASX: ANZ), Brambles (ASX: BXB) and Wesfarmers Limited (ASX: WES) are among the blue-chip companies.
Screens mean major blue-chips are excluded, for example, BHP because of uranium mining and fossil fuels and Coles for alcohol and gaming revenue.
Outside the mega-cap stocks are holdings like Insurance Australia Group (ASX: IAG), Orara (ASX: ORA), Bapcor (ASX: BAP) and Deterra Royalties (ASX: DRR), which make up between 3.5% and 6.6% and the portfolio.
Morningstar’s director of manager research, Michael Malseed says the fund has a straightforward approach to ESG.
The fund excludes companies which derive 5% or more of their revenue from alcohol, gambling, uranium and nuclear power, fossil fuel (upstream), generic engineering, pornography, and animal cruelty (cosmetic testing). The fund has zero exposure to tobacco production and controversial weapons.
With a 1.175% management fee, Perpetual Wholesale Ethical SRI falls in Morningstar’s middle quintile.
State Street Australian Equity
Bronze-rated State Street Australian Equity fund aims to outperform the S&P/ASX 300 Accumulation index and is designed for those looking for long term capital growth and lower volatility than the broader market.
The fund’s holdings vary considerably from the benchmark, with less exposure to Australian mega-cap stocks in the banking and resources sectors. Active share, which is a measure of the difference between a portfolios holdings and companies in the benchmark, sits around 80%.
“State Street offers a well-diversified portfolio of Australian equities through balanced sector exposure (20% weighting cap), resulting in far less exposure to financials and resources than the S&P/ASX 300 Index,” says director of Morningstar manager research, Simon Scott.
As of June 2022, the fund’s financial sector allocation was 5.3%, coming in 22.2% below the ASX 300.
The fund is also underweight in the materials sector at 16.3% versus the benchmark’s 23.7%. Rio Tinto is the only materials company in the fund’s top 10 holdings.
The fund scores highly on Morningstar ESG ratings, earning a top tier sustainability rating.
The rest of the top 10 consists of healthcare and consumer staples with names like Coles Group (ASX: COL), ResMed (ASX: RES) and Woolworths Group (ASX: WOW) making an appearance.
Smaller companies such as Metcash, AMCOR and Elders are also in the top 10 holdings.
The midcap skewed fund falls in Morningstar’s second cheapest quantile with a management fee of 0.7%.